Real estate investors work hard to track down attractive properties to purchase. Many of them do so in the hopes of generating income by renting the properties out to tenants. The good ones identify which properties are right for them, taking into account the state of the properties, the likelihood that they will draw tenants, and the amount they can clear per month in rent, along with many other factors. They diligently screen tenants and maintain the properties they rent out, with the goal of being the kind of investor who will be easy to work with and the kind of landlord that tenants -- and the neighborhoods in which they live -- will embrace.
Other investors spend a ton of time looking for the right investment real estate company that will protect their investment and help them make good buying decisions on nice properties. Both strategies are all about finding great properties, doing great work and ultimately finding a great tenant.
But what happens when their good intentions are thwarted--sometimes by those who have good intentions of their own? What happens when an investor enters a neighborhood with the goal of cleaning up an abandoned property or a vacant foreclosure and they are met by a person with a clipboard or a nice emotionless letter stating "we don't want your kind in this neighborhood"? You can picture it being said or even typed by someone looking down their nose at you, right!
Are Homeowners Associations Against Real Estate Investing?
That's exactly what's happening in some cases. Many homeowners' associations are cracking down on rentals in their neighborhoods -- in some cases banning them altogether -- citing an increase in illegal behavior and disrepair and a resulting decrease in property values. And that may be true in some cases, but not all. In fact, I would argue that in MOST cases an investor is actually improving the value of a neighborhood by putting a property back on the tax rolls and cleaning up what may have been in disrepair. But,...
Homeowners' associations that enforce these types of restrictions have multiple reasons for doing so.
Common claims include:
- Renters aren't as invested -- literally and figuratively -- in a property, so they're less likely to maintain it. A property that's not well-kept can bring down the value of those around it.
- Renters aren't as committed to the success of the neighborhood as owners are. This can extend to how any common recreation areas are treated.
- The average occupancy of a rented property is shorter than that of one that's occupied by the owner. Shorter occupancies mean more moving vans, more noise, and a sense of impermanence, none of which the associations are eager to promote.
There is no denying that there are valid points being made by these associations. It's a sad but true fact that there are "bad apple" tenants who make life more difficult by association for those who simply want to live in a nice place -- who are willing to abide by whatever homeowners' association regulations are necessary to ensure their residence is kept up to community standards.
But what's also worth noting is that cracking down too much on renters can be counterproductive. In an October 4, 2012, USA Today article, Jayci Grana, who was listed as president of the National Association of Residential Property Managers, makes a valid point of her own.
"You know, it's kind of a Catch-22," she said. "If you make it difficult for homeowners to rent out their properties, they're not going to have the income to keep up with their mortgage; it's going to go into foreclosure, and that's also going to drive down property values."
So how can real estate investors apply knowledge of this trend in a real-world way? In short -- do your research. Before you purchase a property, make sure you know how restrictive the rules are of any applicable homeowners' associations. After you've made a real estate purchase is not the time to be surprised by stringent rental restrictions.
Remember: knowing the current rules isn't enough. What's the prevailing sentiment? How are renters perceived in the area? Has a subdivision had problems with "trouble tenants" that could reasonably lead you to believe the homeowners' association may change the game on you at some point in the future? Knowing what you're getting yourself into (or shouldn't get yourself into before you get yourself into it can save you untold hassles and financial woes in the future.
What is your view on homeowners' association regulations? Are they fair or too restrictive? Your Memphis real estate pro wants to know!